8 Sources of the U.S Financial Crisis – How it all began.

How this economic crisis that began in the United States, and how did it happened? Between all the information being distribute around, on the  easy to find among all the information gleaned on the left and right on the subject. Yet, as a real estate professional, you certainly raise questions about this, as we pose to ourselves.

Peter Langlois, senior economist at The Federation of Chambers of Quebec real estate (FCIQ) focused on the subject, and wrote in late October, an explanatory document, simple and easy to understand, in order to educate ourselves on the importance of this financial crisis. You will find below the summary.

“What is spectacular with the current crisis is the extent of penetration of mortgage tools in the financial system,” he wrote. The sources of U.S. financial troubles are many, but “can be grouped under eight chapters, eight arms of a “financial octopus” eventually stifled some of the jewels of Wall Street”.

To understand what is happening now, it is important to consider other financial crises in the past:
American Savings and Loans (1989-91)
Swedish crisis (1992)
Asian crisis (1997)
Argentine crisis (2001-02).
Desjardins has also published an analysis on the crises of the past 30 years.

For P. Langlois, reflected common signs of these crises, including: real estate speculation, deregulation, debt of the public sector and the drop in local currency … All symptoms showed by the U.S. economy before the current financial crisis.

8 Sources of the U.S Financial Crisis

1. Real estate speculation and deflation of the bubble

Several U.S. real estate markets have experienced dizzying price increases between 1998 and 2005, including Florida, Nevada, New York, Arizona and California. Manufacturers have increased housing starts … until there was a surplus of inventory. It followed a downward spiral on prices, higher interest rates and defaulting owners tied to variable mortgages.

When we talk about real estate speculation, we believe, among others, about Flipping. Nearly 40% of residential transactions in the United States did not acquire a main property (residence). This has been encouraged by several authors and TV shows such as “Flip this House”, for example.

2. Subprime mortgages and mortgage brokerage

The proliferation of subprime mortgages is at the heart of the crash of the U.S. financial sector. From 1994 to 2006, the share of these “tools” increased from 5% to 20%. One of the subprime instruments was the most popular ARM (interest-only adjustable rate mortgage). A formula which allowed to pay only interest, and no capital … for a while!

U.S. mortgage brokers are also covered in the study of sources of the current financial crisis. How? It is suggested that the products to customers were in some cases depending on the premium payment received by the broker.

3. Credit Ratings
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Subprime mortgage news update

• Canada economy to slow, risks to downside – IMF (Reuters)
  Canadian economic growth will slow to 1.8 percent this year and there is a risk of an even sharper downturn as weakness in the U.S. economy spreads beyond the housing sector, the International Monetary Fund said in a report on Monday.
  After growing about 2.5 percent in 2007, Canada’s healthy economy and fiscal standing will help it withstand the global turbulence but external risks will pose a challenge. >> read more
  …….
• Canadian institutions expected to make writedowns (Exec Canada)
  Some of Canada’s five biggest banks are expected to report headline-catching writedowns when they announce first-quarter earnings. The banks have so far escaped with remarkably little damage from the credit market turmoil. >> read more
  …….
• Storm clouds threaten to rain on bank profits (Globe and Mail)
  Canadian Imperial Bank of Commerce said in January that it will take $2.46-billion (U.S.) in pretax writedowns for the two months ended Dec. 31 because of its exposure to the U.S. subprime mortgage market. >> read more
  
  …….
• UPDATE IMF lowers growth projections for Canada on back of US economic downturn (Forbes)
  Canada’s growth will likely decelerate further in 2008 and 2009 as a result of the sharp downturn in the US economy, the International Monetary Fund (IMF) reported. >> read more